Memeorandum

October 14, 2007

Rudy On Taxes

My roving New Hampshire correspondent has provided YouTube video of Rudy Giuliani at a New Hampshire town hall meeting making the supply-side case for lower taxes.

The first video is two minutes and the second is about three minutes. For a quick flavor, come in at the 1:15 mark (it is counting down) of the second video for some Hillarity at Ms. Clinton's expense. Let's try for some links:

Video 1

Video 2

My overall impression is that this is a more relaxed and charismatic Rudy than people may be expecting. As to his message of lower taxes, well, fine, what New Hampshire Republican could object? I encourage the critical listener to set aside any reservations about the applicability of the Laffer curve at current federal levels and focus on the broad themes - at one point, Rudy explains that the Federal government is raising $500 billion more with the new, lower Bush tax rates than it was raising a few years ago at higher rates. Of course, one may be left wondering whether the growth in the economy could have occurred without those tax cuts and whether current federal revenues would be even higher if we were collecting at the old rates applied to the newly grown economy. But Rudy doesn't seem to be worrying about that, so I won't either. In any case, at other points he clearly talks about the importance of cutting the right taxes, so I suspect he has a reasonably firm grasp of the issues here.

Comments

Thanks for the Rudy notes.

Helps the insight and is *snap* a great new direction for bloggers insight and another good bypass around mainstream media clunkiness. I hope the Times write more articles that make you fume about presidential candidates.

The lowering taxes/raising tax revenues is now a contradiction in terms only to fools. Rush says the Dems are not fools; that it is not about tax revenues, it's about control.

For years I've thought they were economic idiots, but they just want to keep us economic idiots. They lose the revenue argument over and over but can't tell us what they really want, which is control over every aspect of our lives via progressive and aggressive tax rates.

Does Rudy actually believe that the concerns he needs to address for primary voters are even vaguely related to taxes?

My economic concern with him involves the degree to which government can or should regulate consenting economic conduct and the degree to which criminal rather than civil sanctions should be used to police that conduct. In other words, I'm still unhappy about 1985-88. In this age of Sarbanes-Oxley, Rudy's Justice department would have a significantly larger toolbox with which he could dismantle other job-creating growth engines.

To his credit (detriment?) he did not continue those tactics once he had made his political name. In public (and private!) life, one gets the impression that he is a man of principle, albeit the principle that we should pursue policies that are good for Rudy.

"Of course, one may be left wondering whether the growth in the economy
could have occurred without those tax cuts and whether current federal
revenues would be even higher if we were collecting at the old rates
applied to the newly grown economy."

And of course while one might wonder that, I would suggest that this
reasoning is mistaken.

Of course if tax rates were increased federal revenue would increase.
The problem with this reasoning is that it's only true in the short
term. When we look at the longer run it's possible and maybe even
certain that the effect will be negative.

I'm not talking about the Laffer curve which is another thing entirely.
I'm talking about the differential productivity of a dollar spent
by the government versus a dollar spent privately and the long-term
impact of that on the gross national product of the United States.

Suppose at current levels of taxation the productivity of a dollar
spent privately is 0.3% higher than a dollar spent by the government.
That's a very modest assumption -- only one-third of one percent higher.
Most people with any familiarity with government spending would assume
the private sector is far more effective than that. But let's take this
conservative assumption, this significant understatement of reality, and
see what it means.

Suppose we start with a tax rate of 36% and drop that rate by 3%
to 34.9%. And suppose there's a 30% Laffer Curve effect rebound so that
the new effective tax rate is 35.3%. At this point total tax
revenues have dropped 2%. That's the short-term impact. But the money
that the population is keeping is being used more productively than if
it had been spent by the government. That means the gross national
product grows faster than it would otherwise, or by the assumption above
at rate three thousandths faster. That means that in succeeding years
the pool of wealth to be taxed grows larger than it would have in the
absence of the tax cut.

Looking just at the impact on federal revenues:

In the first year revenues are 2% lower than they would have been.
The second year 1.7% lower.
The third 1.4% lower.
The fourth 1.1% lower.
The fifth 0.8% lower.

By the eighth year something remarkable has happened. Tax revenues
are actually higher than they otherwise would have been.

By the thirteenth year revenues are 1.6% higher and the economy is 3.6% larger.

By the twentieth year revenues are 3.7% higher per year than they
would have been if the tax rate had been kept at 36% for twenty
years versus 34.9% -- even more important, the economy is 5.8%
larger, which is to say that the population is 5.8% wealthier.

Thus tax increases increase federal revenue at the cost of long-term
growth, cheating our children and those of us that expect to live
for any length of time. Likewise, at current levels of taxation, the
lack of tax cuts cheat our children and pretty much everyone under retirement
age.

This doesn't mean that we would be better off with no taxation at all
because the differential productivity is going to vary with the level
of government spending. If government spending were say only five percent
instead of 36% then that spending at the five percent level is more
likely to be essential and productive and it might even be that at that
level a government dollar was more productive than a private.

Also I need to mention that's it really the level of spending that
sets the true level of taxation and not the nominal percentages that appear
on a tax return. Borrowing money to spend is a tax on taxpayers just
like the federal income tax; it's just a bit delayed and much more hidden.
The reality is that taxation has been increasing not decreasing.

Perhaps that resolves my concern. Like General Motors, Rudy's ambitions are now national in scope. He will pursue policies that are good for the nation, if only because they will be therefore good for Rudy.

Seriously, I'm really struggling with whether I could vote for Rudy. As a Feb. 5 voter, my primary vote actually matters* for once. For all his flaws (and they are legion), his NYC experience in turning around Dinkin's Disaster is most appealing to me.

*In a 1/125,000 kind of way. OK, maybe a 1/500,000 kinda way. But I'd consider volunteering if I could just get energized ...

From Mike B - "Not so sure I agree on totally eliminating the death tax. Paris Hilton doesn't need more."

From an ideological standpoint: What does what Paris Hilton's "needs" have to do with anything? Are you really advocating that it is the state's job to assess peoples assets and then take from them anything they decide they don't "need"?

From a realistic standpoint: Do you really think much of the Hilton estate would be liable for U.S. taxation in an inheritance situation? Do you think they keep a large part of their assets here in the states, or is it more probable that they are kept in off shore tax havens? And realistically, those tax haven's aren't going anywhere. Too many politicians, the Kerry's and the Kennedy's to mention just two, have their own wealth to protect, despite for calling for the "wealthy to pay their share".

The fact is that the inheritance tax effects the middle class to a much greater extent then it will ever effect the wealthy, who supposedly it is directed at.

I'm always amazed when I hear part of the electorate advocating the government to load up the pistol and take a shot at the wealthy. Inevitably that bullet ricochets back at the rest of us.

The Laffer Curve is real and observable given significant changes in marginal rates. But one would have to be awfully calculating to defer economic effort at 36% but pursue it at 34.9%.

After all, who do you know who would say "I'd work another hour of overtime at $50 per, but since I'll only be able to keep $32.00 instead of $32.55, it's just not worth it. If only I could have that additional $0.55, I could buy a newspaper and still have enough money to park at a meter for 2 minutes. Then, you'd see me work!"

I hope you realize that the effect I'm talking about above does not
depend on the Laffer curve. It is not an extrapolation of it. The real
of heart of it are those differential rates of productivity.

You can remove that Laffer tax rebound effect entirely and you're still going
to get the same basic phenomena just the dates will change.

My only reason for including it here was to try to be realistic. You
may thick it's implausible that there would a thirty percent rebound,
but in fact empirically, something of that sort has been observed on every
tax reduction even when the reduction was modest.

We can dream up explanations for why, but they are just theories. Note
that we're talking about the behavior of millions of taxpayers. A three
percent change in the tax rate is obviously not going to alter the behavior
of most, but for some that three percent might be the tipping point.

My guess would be that one of the biggest impacts would not be on the number
of hours worked but rather whether people try to use tax shelters or not.
This is an effect that can occur more or less immediately, congruent with
what is actually observed. Tax shelters in general not only shield income
from taxation they also move money into low productivity efforts.

So if some are motivated to not pursue tax sheltering as aggressively
as they otherwise might that would increase the level of productive economic
activity and increase the government's revenues more or less immediately.

Basically I agree with you. To a considerable extent american prosperty
is currently being financed by China, Japan, and a number of other countries.
Japan gets jobs for their money and ownership of american assets,
China gets jobs, ownership of american government assets, and a tremendous
technological transfer. A similar logic applies to Brazil, India, and others.

The current generation is living rather well, but the next is inheriting an
enormous debt. If we treating spending as a better measure of the true
level of taxation then taxes have been rising not falling. Since the payment
is delayed and postponed to the future, current taxpayers aren't really
paying the price for current expenditures.

Also to be fair, even if the government were spending far less than it currently
is. There is a question, in my mind at least, whether the private sector
can really productively use the vast amounts of money flowing to the U.S.
from other countries in their effort to artificial depress their currencies
with respect to ours.

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